Working Paper: CEPR ID: DP18310
Authors: Eugenio Miravete; Katja Seim; Jeff Thurk
Abstract: We explore the determinants of demand curvature and pass-through in aggregate, unit-demand, discrete choice mixed logit models. Accurate pass-through estimates are at the heart of analyses of mergers, taxation, tariffs, cost shocks, and exchange rates when firms have market power. To overcome the inherent curvature restrictions in multinomial logit models, we highlight the need to incorporate heterogeneity in both price responsiveness and preferences for product characteristics. A flexible and parsimonious specification of preference heterogeneity expands the feasible range of elasticity-curvature pairs up to those of the constant elasticity of substitution (CES) demand. We demonstrate empirically significant differences in estimated elasticity and curvature compared to simpler models and highlight their economic relevance in the context of price discrimination.
Keywords: market power; passthrough; demand curvature; demand manifold
JEL Codes: C51; D43; L13; L41; L66
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand curvature (D11) | passthrough (Y60) |
| heterogeneity in price responsiveness (L11) | elasticity-curvature pairs (D11) |
| distribution of consumer preferences (D11) | demand curvature (D11) |
| higher heterogeneity in preferences (D11) | demand curvature (D11) |
| specification of consumer preferences (D11) | passthrough rates (G19) |
| misspecification of demand (D12) | biased estimates of elasticity and curvature (C51) |